Canada: Brokers' Report - April 2013

Last Updated: April 18 2013
Article by Tyler Hodgson, Nicolas Businger, Kristen Riess and A. Nicole Westlake

Most Read Contributor in Canada, September 2016

On February 28, 2013, Justice Stewart of the Ontario Superior Court of Justice issued reasons for her decision granting the Investment Industry Regulatory Organization's ("IIROC") summary judgment motion for costs of disciplinary proceeds against former member Julius Caesar Philip Vitug ("Vitug") following the hearing of the motion held on October 19, 2012.

Vitug had been a registrant with the Investment Dealers Association ("IDA") since 2001. When Vitug registered, he signed an application in which he agreed to be bound by and observe the by-laws and rules of the self-regulatory organization ("SRO"). IDA's successor, IIROC, subsequently brought disciplinary proceedings against Vitug pursuant to IDA by-law 29.1 alleging that he engaged in "business conduct or practice which is unbecoming or detrimental to the public interest [...]." On March 31, 2009, the IIROC Hearing Panel found Vitug guilty and in a separate decision, imposed a fine of $350,000 and ordered costs of the proceedings in the amount of $80,000.

Vitug appealed the ruling to the Ontario Securities Commission ("OSC") on its merits but did not take any position with respect to the quantum of the fine or costs award. The OSC dismissed Vitug's appeal. Vitug then further appealed the decision to the Divisional Court of the Ontario Superior Court of Justice and that appeal was also dismissed.

On its motion for summary judgment, IIROC sought payment of the costs award of $80,000 on the grounds that Vitug agreed to pay the costs of any disciplinary proceedings against him by virtue of his registration with IIROC and that the obligation was a contractual one capable of being sued upon.

Justice Stewart held that the agreement between IIROC and its members is one of contract. Members agree to be bound by the rules and by-laws of the SRO in exchange for registration in the organization and a member acquiesces to any rule changes by virtue of his continued registration. The requirement for payment of a costs award is contained within IIROC's rules which Vitug agreed to be bound by. She further held that the absence of any statutory authority allowing a costs order to be sued upon did not alter the ability to do so.

Justice Stewart also noted that there are significant benefits associated with membership in IIROC, namely the ability to participate in the securities industry. In order to afford investors a level of protection, IIROC needs to have the ability to take action against members guilty of misconduct. Sufficient procedural protections already exist which afforded Vitug the opportunity to defend himself in any proceeding and allowed for appeal.

This ruling provides a precedent for IIROC, and other SROs, to pursue a civil action against members who fail to pay a costs award arising from a disciplinary proceeding. When former members refuse to pay a costs award and IIROC can longer use the threat of revoking registration as a means of enforcement, this decision provides an alternative remedy.

On February 22, 2013, the Mutual Fund Dealers Association ("MFDA") released a bulletin advising of the approval of amendments to MFDA Rule 2.2.1 ("Know-Your- Client") and Policy No. 2 Minimum Standards for Account Supervision. Of significance, the amendments to Policy No. 2 incorporate MFDA member regulation MR-0069 Suitability, concerning obligations for dealers and representatives to assess suitability when leverage is involved. The amendments detail the general obligation for dealers and representatives to establish policies and procedures to assess the suitability of the use of leverage as part of overall suitability obligations. The changes will, among other things, codify minimum criteria standards for assessing the suitability of client leveraging and provide guidance on the type of documents MFDA members will be required to review and maintain to facilitate supervision of a leveraging strategy.

According to MFDA Staff, these amendments to Policy 2, in conjunction with the revised leverage risk disclosure in MR-0074 Leverage Risk Disclosure, guidance in MR-0069 Suitability and the MFDA Leverage Supervision Guide, are designed to assist Members in developing best practices to meet their regulatory objectives with respect to leverage.

On February 5, 2013, the Government of Canada introduced Bill S-14, An Act to amend the Corruption of Foreign Public Officials Act (CFPOA). Bill S-14 has passed its first reading before the Senate of Canada and would provide five major changes to the CFPOA:

  1. Increasing the maximum sentence of imprisonment applicable to the offence of bribing a foreign public official from 5 years to 14 years (there is still no maximum fine amount);
  2. Eliminating the facilitation payments exception to that offence;
  3. Creating a new offence relating to books and records and the bribing of a foreign public official or the hiding of that bribery;
  4. Making the CFPOA applicable to not-for-profit organizations; and
  5. Establishing nationality jurisdiction that would apply to all of the offences under the Act.

Establishing a nationality-based jurisdiction for the CFPOA constitutes a major change in the legislative regime. Under current law, the Canadian authorities only have jurisdiction over offences that occur in whole or in part in Canada. Under the proposed change, the authorities would have jurisdiction to pursue acts of bribery committed by any Canadian citizen, no matter where in the world the act is alleged to have occurred and regardless of whether it has any connection to Canada.

There have been several recent high profile international scandals involving Canadian companies recently. These amendments to the CFPOA will sharpen Canada's international enforcement tools in the fight against bribery and corruption.

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